WHY OIL COSTS MORE: CASE STUDY – RIGS

Why? Because the investment to find new oil is huge and it is getting harder to find new oil so why make the investment? This tightens supply in a time of mad demand and short term prices go up. As the article points out, by the time the rig supply crunch is alleviated, the question of where the new fields to drill in will be has no clear answer. Therefore, long term prices go up. (6th in the WHY OIL COSTS MORE series: KAZAKHSTAN, SAUDI ARABIA, NIGERIA, VENEZUELA, INDIA, CHINA, JAPAN)

Rig Shortage to Persist For Now, Underpining Oil, Gas Prices
Jun Yang, September 5, 2007 (Dow Jones Newswires via RigZone)

WHO
Keppel Corp., the world's largest builder of offshore oil rigs (Teri Liew, senior manager)

Offshore rigs are marvels of technology and ocean engineering. (click to enlarge)

WHAT
A shortage of new and renovated drilling rigs, expected to last for years, leads to less exploration, less discovery and less production. This leads to less reinvestment, which leads to less new and renovated drilling rigs.

WHEN
- Question: When did the cycle begin? How about this answer: It began when the easy-to-get-at oil ran low and oil that was harder to get at started putting demands on rigs.
- 50+ rigs are under construction; delivery is expected in 2009 and 2010.

WHERE
- The hard-to-get-at, expensive oil: Frigid climates, war regions where maintenance is hard to do and deep offshore sites.
- Keppel Corp. is based in Singapore.
- Supply shortages will ease first in the Gulf of Mexico, where returns are most likely.
- India and China oil supply development and industrial growth are slowed by these problems.

WHY
- Deep offshore equipment worldwide is not available, owners are operating at/near full capacity, fees are $500,000/day. Without rigs, drilling projects are delayed, production is not expanded and what drilling gets done is more expensive.
- Keppel has orders for $7.4 billion, work that will extend 3 years.

This is an especially illustrative rendering. (click to enlarge)

QUOTES
- Liew, Keppel Corp.: "It is a fair observation that demand for deepwater structures is currently more noticeable with the oil and gas industry moving its (exploration and production) operations further offshore and into increasingly deeper waters…"
- Steven Knell, analyst, Global Insight: “[High exploration costs due to costly rig rentals] may well be one of the defining features of the high oil price environment typical of the last three years…New rigs are being commissioned all the time, but it is difficult to say whether these tight conditions will ease any time soon. For every new rig, there is a new exploration opportunity to pursue…"